Option Investor

Daily Newsletter, Saturday, 1/19/2019

Table of Contents

  1. Market Wrap
  2. Index Wrap
  3. New Option Plays
  4. In Play Updates and Reviews

Market Wrap

Back to 2017

by Jim Brown

Click here to email Jim Brown

The Dow and S&P closed on Friday within a couple points of where they closed 2017.

Weekly Statistics

Friday Statistics

The futures were already positive overnight before the news broke of the potential offer from China to buy $1 trillion in goods from the US over the next six years. That would push the deficit with China to nearly zero by 2024 as purchases ramp up. They can easily accomplish this with purchases of food, oil and LNG. These are things they need in abundance and we have plenty to sell.

Since negotiators are not going to meet again until two weeks from now, this was seen as a "soft" offer or a trial balloon. They made a suggestion in the press and both countries will see how it plays out with their parties.

This would give both presidents something to claim as a big win and not really have to get into much detail on the harder issues. The key will be whether President Trump is desperate enough for a win that he withdraws his demands for intellectual property reform and forced technology transfers. These are the more important problems and the ones hardest to correct. Most believe it will take a concerted and lengthy effort by the WTO and TPP members to force China to make the changes. Analysts do not believe Trump can force China to do anything on those issues. Trade representative Lighthizer told Senator Chuck Grassley last week that he did not see anything material being changed.

Since the president watches the market constantly as a barometer of his success, he may want to notch a big win on the surface and decide to fight again on the remaining problems if he is reelected. That would remove a major cloud from the market today.

Investors are so excited that there may be an end to the China trade problem that they were buying everything in sight on Friday. If this continues next week ahead of the meeting with China, we could see a sell the news event if a deal is eventually announced. All the expectations would already be priced into the market.

The Consumer Sentiment report for January was a huge disappointment. The headline number declined from 98.3 to 90.7 and the lowest level since October 2016 and just before the presidential election. There are 800,000 people out of work and daily feuds between the president and democratic leaders suggest the shutdown could go on for weeks. The Nasdaq had fallen more than 25% int a bear market at the end of December. I am surprised the headline number was not lower.

The present conditions component fell from 116.1 to 110.0 and the expectations component fell from 87.0 to 78.3. Businesses reporting improved conditions declined from 59% to 45%. Take 800,000 spenders out of the market and you are going to see an impact to retail expectations.

I doubt anyone is going to get too upset over this number since it was clearly the result of the government shutdown. If the government were to reopen next week it would probably be several months before sentiment returned to prior levels. It rises slow but comes down fast.

Industrial production rose 0.3% for December, the seventh consecutive month of gains. It was a close call because utility production declined -6.3% because of unseasonably warn weather. The nationwide blizzard this weekend will pump up production numbers for January. Motor vehicles and parts rose +4.7% and mining/energy +1.5%. Those two categories offset the decline in utilities.

Manufacturing output increased 1.1% and the largest gain since last February. That represents a 3.2% rise over the last 12 months. Total capacity utilization rose 0.1% to 78.7% and the highest level in four years. The report was ignored.

The few reports we had over the last week offset each other in GDP impact. The Atlanta Fed real time GDPNow forecast for Q4 is 2.8%. The first look at the Q4 number is scheduled for Wednesday January 30th but it will not happen unless the government shutdown ends.

Analysts are mostly in agreement that the shutdown is subtracting between 0.1% to 0.15% from Q1 GDP each week. If it continues past the end of January that number rises to -0.2% per week. People will have spent their savings and drained their checking accounts and the consumer spending shutdown will be in full bloom. Most shutdowns last about a week. They rarely even produce a noticeable drop because impacted families have a week or two of cash in their accounts and credit cards. After two weeks those assets have been plundered and they are starting to look under the sofa cushions, emptying the piggy banks and cleaning out the change holders in the car. After four weeks they are taking stuff to pawnshops and borrowing money from friends. This creates more debt and takes longer for the depression period to be erased once the shutdown is over.

The market is closed on Monday for Martin Luther King Day.

Some of the reports listed may not appear because of the shutdown and the impact on government agencies but I listed them anyway just in case there is a breakthrough in the standoff.

Next week is Fed week again. It seems like the meetings are coming with increasing frequency but that is only because the uncertainty is causing them to be more traumatic and that produces more coverage in the press before and after the events. Every meeting in 2019 will have a press conference and the potential for a rate hike. At least that was the idea when Powell set it up this way six months ago. He was anticipating rate hikes in 2019.

Currently there is only a 0.5% chance of a rate hike at the January meeting based on the Fed funds futures. Even if you go all the way out to the December meeting there is only a roughly 28% chance of a rate hike. This means that at some point in the year, Powell is going to upset the market with an unexpected hike, but most believe July would be the earliest potential hike and even today there is only a 31% chance based on the futures.

January Meeting

December Meeting

The US and Chinese trade delegations will meet again in two weeks. I do not have the exact date, so I did not put it on the calendar. While they could reach some agreements, nothing will happen until Trump and Xi meet again so both can get their Kodak Moment signing the agreements. March 2nd is the date the US tariffs on China rise from 10% to 25% so expect an agreement before March 2nd.

Earnings intensity increases next week with a bit more diversity in the company's announcing. IBM and Intel will be the biggest tech stocks followed by several chipmakers. Starbucks reports on Thursday. Other Dow components include JNJ, PG, UTX and TRV.

Some 55 S&P companies have reported Q4 earnings with average growth of 14.2%. More than 76% have beaten analyst estimates. Revenue growth has averaged 5.6% with 58.2% of companies beating estimates. The current forward PE is 15.4. There are 60 S&P companies reporting next week.

Historically the actual earnings growth ends the quarter about 4% higher than the estimates at the beginning of the cycle. That would put Q4 earnings growth in the 18% range if the trend continues. We will track this as the cycle progresses.

The big news for Friday was the reaction to the Netflix earnings after the bell on Thursday. Earnings of 30 cents beat estimates for 24 cents. However, revenue of $4.19 billion missed estimates for $4.21 billion. The 30 cents of earnings were only one third of the 89 cents they posted in the year ago quarter as the company pours money into content generation. They created 781 hours of original content in Q4.

They added 1.5 million domestic subscribers and 7.3 million international subscribers. The 8.84 million totals easily beat their own projections for 6.1 million. They ended the quarter with 139.26 million paid members. They probably have twice that many if you count the shared passwords where people are not paying. Netflix said they now accounted for more than 10% of TV hours watched in the US. More than 80 million people watched the recently released movie "Bird Box" with Sandra Bullock. That is 2 hours of my life I can't get back.

In addition to the minor revenue miss they guided for 21% revenue growth in Q1. That was below estimates for 24.1% and $4.59 billion. For the full year in 2018 revenue rose 36% to $15.79 billion and missed estimates for $15.81 billion. They guided for Q1 earnings of $253 million that missed estimates for $371 million.

CEO Reed Hastings said they lost more viewers to the game Fortnite than they did to HBO or any of the other streaming networks trying to garner eyeballs.

Shares declined 4% after the earnings BUT 22 analysts upgraded the stock or raised their price targets. The key point was a claim by Hastings that costs have peaked and would remain flat in 2019 and then decline. Cash burn in 2019 would be the same $3.1 billion as in 2018 but then decline. Basically, after ten years of rampant growth and creating thousands of hours of original scripted content, they expected to be at a point where revenue will eventually exceed costs and profits will increase.

Amazon got a pass for the last 18 years because they were building the business. Earnings were nonexistent and everyone believed the Bezos dream of build it and they will come. The same has been true for Netflix. They have been given a pass in years past because of the rampant growth of the business model. They are growing so fast, all the new startup streaming companies will be a decade behind them and most will never progress out of a domestic audience. By the time Disney has 25 million subscribers, Netflix will have over 200 million, maybe well over 200 million. They are growing at the rate of 8 million per quarter and that number is accelerating. Now that Netflix is in more than 190 countries and their infrastructure is already built they are a decade ahead of everyone else. Nobody else can afford to spend the $100 billion it took for Netflix to get to this point.

Of the 14 analysts that raised their price target on Friday, the average target was $430 with the highest at $500 by Pivotal Research Group. The lowest was Nomura at $320, a $20 increase. There were 12 targets hikes over $400 just on Friday.

Give up buying options on Netflix. With the stock at $340 it would cost you $17 to buy a $400 call for June. A better plan would be to buy a $350 call for $35 and sell a $320 put for $27 and have a net debit of $8 for a position only $10 OTM.

Tesla (TSLA) shares were knocked for a 13% loss after the company said it was laying off 3,100 workers to increase margins. The company said it would report a profit for Q4, but it would be less than the $312 million is posted in Q3. Musk said they were still ramping up Model 3 production ahead of the end of tax credits on July 1st. He said Tesla had to continue making manufacturing improvements and reducing costs in order to make a 220-mile range Model 3 for $35,000, which was the original goal. He said the most affordable current offering was a 264-mile car with premium sound and interior for $44,000. As of July 1st, the price of a Model 3 will rise $1,875 when the tax credit ends.

The company delivered almost as many cars in Q4 as they did in all of 2017. Musk said the company would post a minor profit in Q4 "with great difficulty, effort and some luck" thanks to accelerated shipments of higher priced cars to Europe and Asia.

Tesla increased its employee count by 30% when they were racing to produce high volume of the Model 3 to satisfy investors and the backlog of customers. In the earnings warning there was no guidance for future production. Musk had promised 10,000 Model 3s per week in 2018 and then lowered that to 7,000. They are currently producing just under 5,000 after having hit that number several times. Analysts believe they will never hit 10,000 and probably reach a sustainable 5-6,000 sometime in 2019. Musk is finding out that making cars is hard and Tesla is probably running out of buyers willing to pay $60-$75K for a fully featured Model 3. The remaining reservations are more than likely for the budget model and that is where profits are hard to produce.

Apparel maker VF Corp (VFC) celebrated its earnings report with a 12% gain in the stock. The company said it was seeing high demand for its Vans shoes and North Face apparel. They reported earnings of $1.31 that beat estimates for $1.10. They posted a loss of 23 cents in the year ago quarter. Revenue rose to $3.94 billion and beat estimates for $3.87 billion.

The division not doing well was the Lee and Wrangler jeans where revenue is expected to fall 3% in 2019. The CEO squashed rumors they were going to acquire Skechers saying the rumors were not true and the product would not fit well in the current portfolio.

Oil services giant Schlumberger (SLB) reported earnings of 36 cents that matched analyst estimates. This was substantially better than the $1.63 loss in the year ago quarter .Revenue declined slightly from $8.504 billion to $8.180 billion but still beat estimates for $8.044 billion. The company said the surge in shale production even while oil prices were falling, helped them to improve their earnings. Oil production hit a record 11.9 million bpd last week.

Schlumberger said 2019 should provide a more stable supply/demand balance once Russia and OPEC complete their production cuts. The CEO reminded that the exceptions to the Iran export sanctions will expire six months after the sanctions were imposed. Schlumberger said they were cutting back on capex in 2019 to a range of $1.5-$1.7 billion and down from the $2.1 billion in prior guidance. They warned that the volatility in crude prices has led to more uncertainty among producers. Shares rallied 8% on the report.

Alibaba (BABA) said it was cutting spending on travel and postponing new hiring until April. The company is bracing for a slowdown in the Chinese economy. Chairman Jack Ma said the trade battle with the US was causing a slowdown all over Asia and was hitting all sectors. Offers to prospective new hires were only effective if they agreed to start in April. The company is restricting air travel and no longer paying for expenses like cab fares.

China is expected to grow at a 6.2% pace in 2019 and the slowest growth since 1990. Car sales in 2018 fell for the first time in more than 20 years. Debt to GDP rose to 253% up from 140% in 2008. No country in history has ever been able to solve that large of a debt crisis without a financial calamity. The US debt to GDP is 108%. Some 24% of outstanding loans ($8.5 trillion) in China are non-performing. That means they are no longer making the payments, but the banks are keeping them on the books rather than take the pain of writing them off.

Apple shares were positive but only barely. The cloud hanging over Apple grew darker after Taiwan Semiconductor (TSM) warned of a major earnings miss because of declining smartphone sales. Q1 revenue is now expected to be in the range of $7.3-$7.4 billion, down 14% and well under the $8.1 billion analysts expected. The company said slowing demand for high end phones had caused a sharp increase in inventory levels. TSM received 45% of its income from smartphones and Apple is its biggest customer. They said due to the sector outlook they were cutting capex spending by several hundred million dollars. Analysts warned that channel checks suggested the surplus inventory of phones could continue for the first half of 2019. Shares posted a small gain after a decent rebound on Thursday.

Analysts are still positive on Apple but continue to cut their estimates given the universal slowdown in the chip sector. Apple is getting pushback from developers for its high prices in the App Store and the prior upgrade cycle trend is fading fast. Without some killer feature on the 2019 lineup of phones, and a lower price, the company could warn again.

Phones, with the exception of the iPhone, are getting cheaper. Apple was forced to cut prices by 20% in China last week to compete with lower cost models and flush out a buildup of inventory in China.

Numerous analysts love Apple but are concerned earnings could be even less than expected. Apple warned but conditions have come to light since then that produced more concern.

Facebook (FB) is under the gun and the FTC is considering a "record" fine for its recent privacy mistakes. In 2011 the FTC entered into a settlement agreement with Facebook over repeated privacy violations. The settlement agreement period runs until 2031 and requires Facebook to get explicit permission from users before sharing any personal information that is not already covered by their privacy settings.

Facebook has violated this settlement multiple times over the past year and the FTC is planning on making them pay a lot for their transgressions. The feeling is that it will be enough to force them to do a better job of policing in the future. The FTC will not comment officially but we saw a $5 billion fine in Europe against Google. The repeated violations of the privacy rules by Facebook when they already have a privacy settlement in place, suggests this fine could be a whopper. Facebook has 2.2 billion users so just $2 each would be a major fine.

Ten months ago, the Cambridge Analytica scandal broke and Facebook was tortured for months with testimony and public humiliation. In December they acknowledged the photos of 7 million users had been shared publicly even though they were private. Facebook is also under investigation in multiple other countries for the same problem. This is going to be painful. Earnings are January 30th.

Microsoft (MSFT) is getting out of the phone business. They recommended that anyone using a Windows Phone using the Windows 10 mobile platform should immediately switch to an iOS or Android device. On December 10th, 2019, Microsoft will stop providing new security updates, hotfixes, assisted support options or technical content updates from Microsoft. Microsoft spent tens of billions of dollars trying to produce a competitive Windows phone. They even bought Nokia for $7.6 billion in order to produce their own phones. They eventually wrote that acquisition off as a failure. If you have a Windows Phone, save it for 20 years and sell it as a historical antique much like old Apple computers today that go for thousands of dollars.

Crude prices surged on Friday after the $1 trillion trade proposal was floated by China. Getting a trade deal done and especially one where China buys that many products from the US would increase oil demand. China is a major importer of oil. If they complete a trade deal that removes all the tariffs it means China's factories can go back to work at full production and that requires more oil.

The US is becoming a major oil exporter at 2-3 million bpd and rising. If China signs a $1 trillion deal, oil purchases and LNG purchases are going to be on that list. Having a big buyer locked in will support WTI prices long term. Crude closed at a two-month high.

The three months of falling prices finally took a big toll on active rigs. Land rigs in the US fell by a whopping -25 for the week ended on the 18th. Twenty-one oil rigs and 4 gas rigs were taken out of service. An additional two offshore rigs were offline. Despite the decline in rigs, oil production rose 200,000 bpd to 11.9 million bpd and a new record.

The EIA said last week that US production will rise to average 12.9 mmbpd in 2020 and lead the US to export more oil than it imports. The average production in 2018 was 10.9 mmbpd. That will rise 2.0 mmbpd by 2020 to average 12.9 mmbpd but that means the actual production at year end will be well over 13.0 mmbpd. At the end of 2018 net imports into the US fell to 2.4 mmbpd because our exports were rising rapidly. By the end of 2020 the EIA expects the US to become a net exporter by 900,000 bpd.

Refined product inventories continued to grow but oil inventories are barely declining. Refinery utilization declined sharply to 94.6% for the week ended on the 11th.


Just how bad was the market crash in Q4? Investors pulled a record $143 billion from actively managed funds in December alone. That brought the total for the year to -$301 billion and just below the record of $320 billion in 2016. Passive funds and ETFs gained $60 billion in December as investors fled to a cheaper, longer term investment. Passive index funds have risen to $6 trillion in assets while ETFs have risen to $3.6 trillion in assets. Investors are losing faith in fund managers since most did not beat the market in 2018.

The Dow and S&P both closed within only a few points of their 2017 close. The S&P closed at 2,673 on December 29th, 2017 and 2,670 on Friday. The Dow closed 2017 at 24,719 and closed on Friday at 24,706. For both indexes to be so close to their 2017 levels at the same time is remarkable. All the volatility of 2018 is hopefully behind us.

The S&P surged over the 10% correction level at 2,637 and appears to be headed for round number resistance at 2,700 followed by the convergence of multiple resistance lines at 2,750. The ultimate test will be 2,800. Once over 2,700 that higher target will become a magnet for investors and could prompt a sell the news event when reached.

The Dow had a great day on Friday with all the tariff sensitive stocks posting strong gains. Unfortunately, the China news story is going to fade before we get any real data. The next trade meeting is not for two more weeks. Minor details may leak out, but any real deal will not occur until Trump and Xi meet again to sign any deal and get their pictures taken for the consumers at home.

The Dow eased over minor resistance at 24,700 by only 6 points so that level is still in play. The real hurdle will be 25,000 and the convergence of the 100/200 day averages and the horizontal resistance since July. After the big run over the last four weeks, the Dow is very overbought and continued gains could be rocky.

The Nasdaq has yet to regain the 10% correction level at 7,298 and there are multiple types of converging resistance at that level. The downtrend resistance since October and the 100-day average as well as the round number resistance at 7,300 should make that a volatile location. The big cap tech stocks have been mostly positive for the week and the index gained 2.6% so it was a good week. The techs are lagging the big cap indexes because of weakness in the chip sector, thanks to Apple. There are only a handful of tech stocks reporting next week so the following week is where the tech earnings will flow.

The Russell had a good week after a slow start. After three weeks of gains it went through several days of consolidation before surging ahead. The lack of a rate hike threat and the potential for a trade deal helped encourage fund managers it was safe to buy small caps again.

While I believe the market is going higher, we have had a four-week rally and the Dow is very overbought. We are at risk for a post earnings consolidation period. Since tech earnings are still a week away that should get us through this week without any major decline. Expectations are still in play. Several high-profile earnings misses or warnings could easily kill those expectations but investors have been buying bad news. I would continue buying the dips until we are proven wrong.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"If you believe it will work out, you will see opportunities. If you believe it won't, you will see obstacles."

Wayne Dyer

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Index Wrap

Luck Running Out?

by Jim Brown

Click here to email Jim Brown
Will the lure of tech earnings keep the markets positive for a fifth consecutive week? Since earnings are only averaging about 14% growth for Q4 and down from the 22% in Q3, the expectations have faded. However, compared to sentiment four weeks ago we are significantly improved.

The challenge will be to navigate the mine field of earnings beats without owning the stock that finally blows your foot off with a disappointment. Fortunately, some of the stocks that have posted disappointments have not imploded. The $14 decline in Netflix is just a hiccup compared to the 50% gain since Christmas.

Netflix is a cult stock. We are probably not going to be so lucky with other stocks as the earnings cycle continues.

Working in our favor was the extremely oversold conditions on the Christmas lows. However, after four weeks of gains we have reversed to the overbought side of the ledger. Just like markets can remain oversold for longer than we expect they can also remain over bought for longer than we expect. Hopefully that is the case this week.

The overbought pressures are rising as we can see in the AAII sentiment report for the week. Despite a 700-point gain in the Dow the bullish sentiment declined -4.9% and bearish sentiment rose almost 7%. This survey does close on Wednesday so the $1 trillion offer from China was not yet in the market.

Ignoring the sentiment survey and focusing on the A/D line on the S&P puts everything into perspective. The A/D has gone almost vertical and almost to a new high. On Thursday the A/D line on the S&P was 6:1 in favor of advancers. That rose to 10:1 on Friday with 452 advancers to only 43 decliners. These are very bullish ratios, but it also shows just how overbought we are becoming.

Another remarkable chart is the percentage of S&P stocks over their 50-day average. This percentage has rocketed from only 1.25% at Christmas to 72.8% on Friday. This is a very dramatic representation of the recent gains.

The 200-day comparison chart is not nearly as dramatic but the longer-term average had not had time to decline as much as the 50-day.

Only 48% of the S&P stocks have current buy signals. This could be a rebuttal to the overbought claim above. However, this is based on point and figure charts which typically have a longer reaction time to a normal chart. It takes longer for stocks to trigger a buy signal, but they also stay in that signal for a longer period.

The Nasdaq remains the lagging index still a couple hundred points below the 10% correction level. However, the chip sector is recovering and helping to lift the Nasdaq higher. While chips were down early in the week, they rallied on the China news and that could be a lasting rebound if the tariff news remains positive.

The FANG chart has turned positive. FB, AMZN and GOOGL were chasing Netflix higher but the leader tripped on Friday. I do not expect Netflix to decline significantly but any decline is a blow to FANG sentiment and to the Nasdaq index. I think anyone looking at the chart below would agree that Netflix is probably not going to be surging higher over the next couple of weeks.

The biotech sector is also providing lift to the Nasdaq. The index has moved through a period of congestive resistance and is breaking out to a three-month high. This has a good chance of continuing because Q1 is normally strong for biotechs.

The Shanghai Composite Index has been in a sharp decline for all of 2018. However, since Christmas the index has been accelerating higher. This is due to increased stimulus from the Chinese government, lowered loan regulations and optimism that a trade deal will be completed. The positive index is a sentiment indicator for the rest of Asia. If the index is rising the rest of Asia breathes easier.

The Nasdaq has some serious congestive resistance in its immediate future. Moving between 7300 to 7500 could be a serious challenge and therefore the overbought market could choose to rest here we as wait for an outcome to the Chinese trade meeting in two weeks.

I remain positive on the market and suggest continuing to buy the dips. We could see continued gains for the next two weeks then the outlook turns negative after the major tech companies report. We will be moving into the post earnings depression period about the time the volatility increases surrounding the Chinese negotiations.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

New Option Plays

Breakout Ahead

by Jim Brown

Click here to email Jim Brown

Editors Note:

After a week of consolidation of the January gains this ETF is poised to break out. January and Q1 is normally a bullish period for biotech stocks.


New positions are only added on Wednesday and Saturday except in special circumstances.


IBB - iShares Nasdaq Biotech ETF - ETF Profile

The investment seeks to track the investment results of the NASDAQ Biotechnology Index, which contains securities of companies listed on NASDAQ that are classified according to the Industry Classification Benchmark as either biotechnology or pharmaceuticals and that also meet other eligibility criteria determined by Nasdaq, Inc. The fund generally invests at least 90% of its assets in securities of the index and in depositary receipts representing securities of the index. It may invest the remainder of its assets in certain futures, options and swap contracts, cash and cash equivalents. It is non-diversified. Company description from FinViz.com.

The IBB has 226 stocks and follows the Nasdaq Biotech Index ($NBI). The IBB rebounded strongly from the Christmas bottom and then stalled for over a week in the $108 range as it consolidated its gains. Friday's minor gain set it up to test resistance at $111.50 and a breakout there would target the prior highs at $122.

The first quarter is normally strong for biotechs because of the multiple conferences and calendar of FDA drug approvals. I am recommending we enter a position to benefit from a break over resistance.

Buy March $115 Call, currently $2.10, stop loss $103.85.


No New Bearish Plays

In Play Updates and Reviews

Shorts on the Run

by Jim Brown

Click here to email Jim Brown

Editors Note:

Anyone still short in this market is in trouble. The market was already positive this morning before comments out of China suggested a $1 trillion purchase program to eliminate the trade deficit with that country. The market immediately spiked and held near the highs the rest of the day. If the government is reopened, China signs a deal and earnings are positive we could return to the highs. Today that is wishful thinking, but it is possible.

Current Portfolio

Stop Loss Updates

Check the graphic below for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.

Profit Targets

Check the graphic below for any profit stops in green. We need to always be prepared for a profit exit at resistance.

Current Position Changes

QQQ - Nasdaq 100 ETF
The January call position expired.

Full updates on all plays on Wednesday and Saturday. Only closed plays are updated on other days.

BULLISH Play Updates

CAT - Caterpillar - Company Profile


No specific news. Shares exploded higher over the last two days as rumors of a trade deal with China make the rounds.

Original Trade Description: Dec 22nd

Caterpillar Inc. manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives for construction, resource, and energy and transportation industries. The company was formerly known as Caterpillar Tractor Co. and changed its name to Caterpillar Inc. in 1986. The company was founded in 1925 and is headquartered in Deerfield, Illinois. Company description from FinViz.com.

CAT has failed to decline with the market until the last couple of days. Earnings were good and forecasts were good. CAT has been hobbled by the trade war with China. Investors are worried that tariffs could disrupt its rapidly growing business. CAT said it has raised prices three times to cover the majority of the increased costs and the net impact has only been around $150 million. When a trade deal is reached, you can bet those price increases will not be completely erased. They will make up their losses.

Earnings are January 22nd.

Position 12/24:
Long Feb $135 call @ $2.43, see portfolio graphic for stop loss.

CRM - SalesForce.com - Company Profile


Shares continued higher after the company said it was building a new office complex in Ireland and would add 1,800 employees to double their existing staff in that location.

Original Trade Description: Dec 22nd

SalesForce.com, inc. develops enterprise cloud computing solutions with a focus on customer relationship management. The company offers Sales Cloud to store data, monitor leads and progress, forecast opportunities, and gain insights through analytics and relationship intelligence, as well as deliver quotes, contracts, and invoices. It also provides Service Cloud, which enables companies to deliver personalized customer service and support, as well as a field service solution that enables companies to connect agents, dispatchers, and mobile employees through a centralized platform, which helps to schedule and dispatch work, and track and manage jobs in real-time. In addition, the company offers Marketing Cloud to plan, personalize, and optimize one-to-one customer marketing interactions; Commerce Cloud, which enables companies to enhance engagement, conversion, revenue, and loyalty from their customers; and Community Cloud that enables companies to create and manage branded digital destinations for customers, partners, and employees. Further, it provides Quip collaboration platform, which combines documents, spreadsheets, apps, and chat with live CRM data; Salesforce Platform for building enterprise apps, as well as artificial intelligence (AI), no-code, low-code, and code development and integration services, including Trailhead, Einstein AI, Lightning, Internet of Things, Heroku, Analytics, and AppExchange; and solutions for financial services, healthcare, and government. Additionally, the company offers cloud services, such as consulting and implementation services; training services, including instructor-led and online courses; and support and adoption programs. It provides its services through direct sales; and consulting firms, systems integrators, and other partners. salesforce.com, inc. has a partnership with Apple Inc. to develop customer relationship management platform. The company was founded in 1999 and is headquartered in San Francisco, California. Company description from FinViz.com

When the market is weak, go with strength. CRM shares rallied on the strong earnings then pulled back only slightly during the latest Nasdaq crash. The Nasdaq was the strongest index on Monday and hopefully we are nearing an actual bottom. With CRM shares showing relative strength, this may be a safe port in a volatility storm.

SalesForce.com reported earnings of 61 cents that beat estimates for 50 cents and the year ago quarter of 39 cents. Revenue rose 26% to $3.39 billion and beat estimates for $3.37 billion. The company guided for revenue as much as $3.56 billion in Q4 and analysts were expecting $3.53 billion. They said they were on path for $16 billion in revenue in 2020 and $22 billion by 2022.

Billings, metric of future performance, rose 27% to $2.89 billion and beat estimates for $2.68 billion. Revenues rose 25% in the Americas, 26% in APAC and 31% in EMEA using constant currency. Sales cloud revenues rose 11%, service cloud rose 24% and marketing and commerce cloud rose 37%. Platform and "other" cloud revenues rose 51% or 30% if you exclude the acquisition of Mulesoft. The number of deals for more than $1 million rose 46%.

Adjusted gross profit of $2.6 billion came from gross margin of 76.9%. They ended the quarter with $3.45 billion in cash.

This company can seemingly do no wrong. When the tech sector eventually recovers SalesForce will be a leader.

Earnings February 26th.

Salesforce will be a fast mover if the market turns positive. This is a crowd favorite and has only declined because of the market.

Position 12/24:
Long Feb $135 Call @ $4.04, see portfolio graphic for stop loss.

HD - Home Depot - Company Profile


Worries over an extended government shutdown weighed on HD and LOW for the week but Friday was a good day with a $4.71 rebound.

Original Trade Description: Jan 9th

The Home Depot, Inc. operates as a home improvement retailer. It operates The Home Depot stores that sell various building materials, home improvement products, lawn and garden products, and decor products, as well as provide installation, home maintenance, and professional service programs to do-it-yourself and professional customers. The company also offers installation programs that include flooring, cabinets, countertops, water heaters, and sheds; and professional installation in various categories sold through its in-home sales programs, such as roofing, siding, windows, cabinet refacing, furnaces, and central air systems, as well as acts as a contractor to provide installation services to its do-it-for-me customers through third-party installers. In addition, it provides tool and equipment rental services. The company primarily serves home owners; and professional renovators/remodelers, general contractors, handymen, property managers, building service contractors, and specialty tradesmen, such as installers. It also sells its products through online. As of January 28, 2018, the company operated 2,284 stores, including 1,980 in the United States, including the Commonwealth of Puerto Rico, and the territories of the U.S. Virgin Islands and Guam; 182 in Canada; and 122 in Mexico. The Home Depot, Inc. was founded in 1978 and is based in Atlanta, Georgia. Company description from FinViz.com.

Home Depot shares declined after six consecutive months of declining home sales. The rising mortgage rates were also taking a toll. Analysts are worried the remodel boom will stall. This is simply not the case. When homeowners want to move they do buy materials from HD to fix up the house before they sell. However, when they decide they can no longer afford to sell because home prices and interest rates are too high to justify a move they still fix up their homes because they are going to stay there for a while.

Analysts should not be worried about Home Depot earnings. The entire Southeast was hit by multiple hurricanes and that means many months of repairs that will continue into this summer that are far more costly than what homeowners would be spending just to fix up homes prior to selling. There is massive destruction and damage across multiple states and will require millions of pieces of sheetrock, shingles, siding, home appliances, 2x4s, tools, etc. Hurricane Sandy added between $300-$500 million to Home Depot revenue in the short term and we have two different hurricanes in the same area today. This will add to earnings for quarters to come.

Earnings February 12th.

The company reported Q3 earnings of $2.51 compared to estimates for $2.27. Revenue rose 5.1% to $26.30 billion and narrowly beat estimates for $26.242 billion. Same store sales rose 4.8% and beat estimates slightly. They guided for full year revenue to rise about 7.2% with 5.5% same store sales. They guided for earnings of $9.75.

Morgan Stanley reiterated an overweight position with a $200 price target. Several analysts have written that the Sears bankruptcy will benefit Home Depot and Lowe's because of the overlap in store footprints. Since Home Depot sells tools, appliances, household items, lawn and garden, etc, they will pickup any Sears customers looking for a new outlet.

HD will rally with the Dow for the rest of January as long as the Q4 earnings guidance from other companies does not turn negative.

The market is poised to open lower on Thursday so we should be able to buy a dip at the open. With the February option expiring on the 15th and earnings on the 12th, the premium should have decent support.

Position 1/10/19:
Long Feb $185 call @ $2.66, see portfolio graphic for stop loss.

MDT - Medtronic - Company Profile


No specific news. Shares popped and then declined slightly on Friday.

Original Trade Description: Jan 9th

Medtronic plc develops, manufactures, distributes, and sells device-based medical therapies to hospitals, physicians, clinicians, and patients worldwide. It operates through four segments: Cardiac and Vascular Group, Minimally Invasive Therapies Group, Restorative Therapies Group, and Diabetes Group. The Cardiac and Vascular Group segment offers implantable cardiac pacemakers, cardioverter defibrillators, and cardiac resynchronization therapy devices; AF ablation product; insertable cardiac monitor systems; mechanical circulatory support; TYRX products; and remote monitoring and patient-centered software. It also provides aortic valves; percutaneous coronary intervention stents, surgical valve replacement and repair products, endovascular stent grafts, percutaneous angioplasty balloons, and products to treat superficial venous diseases in the lower extremities. The Minimally Invasive Therapies Group segment offers surgical products, including surgical stapling devices, vessel sealing instruments, wound closure, electrosurgery products, hernia mechanical devices, mesh implants, and gynecology products; hardware instruments and mesh fixation device; and gastrointestinal, inhalation therapy, and renal care solutions. The Restorative Therapies Group segment offers products for spinal surgeons, neurosurgeons, neurologists, pain management specialists, anesthesiologists, orthopedic surgeons, urologists, colorectal surgeons, urogynecologists, interventional radiologists, and ear, nose, and throat specialists; and systems that incorporate energy surgical instruments. It also provides image-guided surgery and intra-operative imaging systems; and therapies for vasculature in and around the brain. The Diabetes Group segment offers insulin pumps and consumables, continuous glucose monitoring systems, and therapy management software. The company was founded in 1949 and is headquartered in Dublin, Ireland. Company description from FinViz.com.

Medtronic tanked after the JP Morgan Conference after the CEO updated guidance and some analysts took it negatively. The company lowered 2019 guidance slightly due to worries over paclitaxel and higher mortality signals. However, the company feels "very confident" the devices are safe and has the necessary data to back up the claim. An analyst at BTIG said the guidance was "very conservative" after talking to the CEO. He said Medtronic should be able to at the very least match its guidance and more than likely beat it.

BTIG said beyond 2019 the company has a "broad and rich" pipeline for fiscal 2020 that will generate more than a 4% growth in several specific areas. He upgraded MDT shares from neutral to buy with a $100 price target.

On Tuesday Medtronic announced a new mobile app that communicates directly with its portfolio of pacemakers. Patients and doctors can monitor the pacemakers on a smartphone or tablet. That means the pacemaker can transmit vital data to the patients smartphone without intervention and the app can communicate with the doctor for analysis. Patients no longer need to be tied to home based monitoring equipment.

Shares rallied the last two days on the new mobile app news and the analyst upgrade.

Earnings February 19th.

I am recommending a May option because there are no March or April options at this time. We can buy time, but we do not have to use it.

Position 1/17:
Long May $90 call @ $2.82, see portfolio graphic for stop loss.

MRK - Merck - Company Profile


No specific news. Shares are still bumpy with the sector.

Original Trade Description: Jan 5th

Merck & Co., Inc. provides healthcare solutions worldwide. It operates in four segments: Pharmaceutical, Animal Health, Healthcare Services, and Alliances segments. The company offers therapeutic agents to treat cardiovascular, type 2 diabetes, asthma, nasal allergy symptoms, allergic rhinitis, chronic hepatitis C virus, HIV-1 infection, fungal and intra-abdominal infections, hypertension, arthritis and pain, inflammatory, osteoporosis, and fertility diseases. It also offers neuromuscular blocking agents; anti-bacterial products; cholesterol modifying medicines; and vaginal contraceptive products. In addition, the company offers products to prevent chemotherapy-induced and post-operative nausea and vomiting; treat brain tumors, and melanoma and metastatic non-small-cell lung cancer; prevent diseases caused by human papillomavirus; and vaccines for measles, mumps, rubella, varicella, chickenpox, shingles, rotavirus gastroenteritis, and pneumococcal diseases. Further, it offers antibiotic and anti-inflammatory drugs to treat infectious and respiratory diseases, fertility disorders, and pneumonia in cattle, horses, and swine; vaccines for poultry; parasiticide for sea lice in salmon; and antibiotics and vaccines for fishes. Additionally, the company offers companion animal products, such as ointments; diabetes mellitus treatment for dogs and cats; anthelmintic products; fluralaner products to treat fleas and ticks in dogs; and products for protection against bites from fleas, ticks, mosquitoes, and sandflies. It has collaborations with Aduro Biotech, Inc.; Premier Inc.; Cancer Research Technology; Corning; Pfizer Inc.; AstraZeneca PLC.; and SELLAS Life Sciences Group Ltd. The company serves drug wholesalers and retailers, hospitals, government agencies and entities, physicians, physician distributors, veterinarians, distributors, animal producers, and managed health care providers. Merck & Co., Inc. was founded in 1891 and is headquartered in Kenilworth, New Jersey. Company description from FinViz.com

Keytruda is expanding its base and is now approved for eight different cancer types. The drug has been approved in China, which has a serious melanoma problem. Sales of Keytruda are expected to reach $22 billion a year by 2022.

The FDA granted MRK a priority review on using Keytruda on a rare form of skin cancer. In a study with 14 patients 64% responded well to the treatment and all 14 saw tumor shrinkage.

Hardly a week goes by that Merck does not receive a new approval on some drugs. They have a very strong pipeline.

Merck shares declined in October after the company reported earnings of $1.19 that beat estimates for $1.14. Revenue of $10.79 billion rose 4.5% but missed estimates for $10.88 billion. They raised guidance for the full year from $4.22-$4.30 to $4.30-$4.36. Revenue guidance was narrowed but stayed in the same range. Shares fell $4 on the earnings but recovered almost immediately to set new highs in early December.

The company raised full year earnings guidance from $4.16-$4.28 to $4.22-$4.30. Revenue is expected to range between $42.0-$42.8 billion, up slightly from the prior $41.8-$43.0 billion guidance.

The company raised its dividend 15% to 55 cents. They also announced another $10 billion share buyback.

The company successfully avoided the October/November market decline but rolled over in early December after they announced the $2.3 billion acquisition of Antelliq, which will join their animal health division.

Shares have started to recover and market willing should be making new highs in the near future.

Merck has earnings on January 24th. I am recommending we buy a cheap February call and hold over the earnings report.

Position 1/7/19:
Long Feb $80 call @ 85 cents, see portfolio graphic for stop loss.

QCOM - Qualcomm - Company Profile


The court battle with the FTC is continuing and there have been some revelations on both sides. Apple tried to overpower Qualcomm and offered to buy $2 billion in chips without a license fee and Qualcomm refused because Apple was sharing the Qualcomm technology with Intel at the same time they were suing Qualcomm for patent fees. Sounds like Apple was the big bully on the block.

Original Trade Description: Dec 31st

QUALCOMM Incorporated designs, develops, manufactures, and markets digital communication products worldwide. It operates through three segments: Qualcomm CDMA Technologies (QCT); Qualcomm Technology Licensing (QTL); and Qualcomm Strategic Initiatives (QSI). The QCT segment develops and supplies integrated circuits and system software based on code division multiple access (CDMA), orthogonal frequency division multiple access, and other technologies for use in wireless voice and data communications, networking, application processing, multimedia, and global positioning system products. The QTL segment grants licenses or provides rights to use portions of its intellectual property portfolio, which include various patent rights useful in the manufacture and sale of wireless products comprising products implementing CDMA2000, wideband CDMA, CDMA time division duplex, and/or long term evolution standards and their derivatives. The QSI segment invests in early-stage companies in various industries, including automotive, Internet of things, mobile, data center, and healthcare for supporting the design and introduction of new products and services for voice and data communications, and new industry segments. The company also provides products and services for mobile health; products designed for the implementation of small cells; development, and other services and related products to the United States government agencies and their contractors; and software products, and content and push-to-talk enablement services to wireless operators. In addition, it licenses chipset technology, and products and services for use in data centers. QUALCOMM Incorporated was founded in 1985 and is headquartered in San Diego, California. Company description from FinViz.com.

The last 12 months have been turbulent for Qualcomm. First they tried to acquire NXP Semiconductor (NXPI). They received approvals from 7 of the 8 countries that needed to approve the transaction. While they were waiting on China's approval, Broadcom (AVGO) made a hostile offer to acquire Qualcomm for $121 billion. Qualcomm would be forced to drop the bid for NXPI if they accepted the Broadcom bid. Qualcomm fought Broadcom and finally got the government to veto the deal under a national security rationale.

Broadcom quickly made a big show of becoming a U.S. company by changing its domicile to the U.S. That was not enough to convince CFIUS they were not a threat. Eventually Broadcom dropped its bid.

Qualcomm tried to continue its acquisition of NXPI but China refused to approve the acquisition and Qualcomm was forced to abandon the acquisition attempt and pay a $2 billion breakup fee.

While Qualcomm and NXPI would have been stronger together, Qualcomm is not sitting still. They are rapidly moving forward on 5G communications, automotive chips, internet connectivity, Internet of Things, network processing, etc.

The company just announced a $30 billion stock buyback. That is one-third of the company using the funds they had set aside for the NXPI acquisition.

The next challenge for Qualcomm is settling the patent dispute with Apple. The phone company has protested the way Qualcomm collects royalties on its products. Instead of only charging a royalty on the specific parts in the phone, Qualcomm has always charged a royalty on the entire cost of the phone. In the beginning, companies did not balk because without Qualcomm's parts the phone would not have been possible. After paying royalties to Qualcomm for years, Apple decided they were paying too much money to Qualcomm and sued them to change the patent. Since Apple and every other phone manufacturer had been paying Qualcomm under this structure for years, Apple does not have a very good chance of winning. They do have a lot of money and the best lawyers in the world but the law is the law and signed agreements are tough to fight.

This suit is expected to be settled soon. Qualcomm has been successful in getting some models of iPhones blocked from sale and with each court action they are making it more likely there will be a settlement soon. The CEO said he thought it would be in Q4 but it has not happened yet.

With a 4% dividend and buying back 33% of the stock, there is no reason for Qualcomm shares not to rise in the coming months. The stock should also be somewhat immune to market movement over the coming weeks thanks to the monster buyback.

Qualcomm reported earnings of 90 cents that beat estimates for 83 cents. Revenue of $5.80 billion also beat estimates for $5.52 billion. However, the company guided for Q4 revenue of $4.5-$5.3 billion and earnings of $1.05-$1.15. Analysts were expecting $5.57 billion and 95 cents. The decline was due to a lack of Apple sales. Apple normally buys 35-50 million chips in Q4 but they have dropped Qualcomm as a supplier until the royalty fight is concluded in court. Shares lost $7 post earnings.

Cowen recently reiterated a buy rating and $73 target. Canaccord Genuity reiterated a buy and $75 target. Bank of America reiterates a neutral and $67 target.

Earnings Feb 6th.

Apple is trying to push out a software update to force phones to remove patent liabilities in China. Qualcomm is pressing the court to force an immediate halt to sales. Apple said late in the day that the China sales ban would force them to settle the patent suit with Qualcomm. Obviously that is exactly what Qualcomm has been trying to accomplish. Apple said being forced to settle with Qualcomm would force all other manufacturers to pay higher royalties as well. Everyone has been hoping Apple would be victorious and they would benefit from the same lower royalties if Apple won. Apple is trying to claim that Qualcomm's royalty agreements, which they signed and paid royalties on for years, is no longer valid because the price of the phone has risen so high. The agreement calls for a set percentage of the sales price as the royalty amount. When phones sold for $400 it was a smaller amount but now with $1,000-$1,500 phones that same percentage is a lot bigger number.

Apple is also playing politics in their court filings warning that China will lose millions of dollars in taxes and revenue if the ban is enforced. Of course, they could just pay Qualcomm what they owe and there would be no ban.

Qualcomm also won an injunction in Germany to force Apple to halt sales of iPhones.

Starting on January 4th, Qualcomm will participate in a 10-day non-jury trial against the FTC. This trial is the key to the settlement of Apple's suits around the world. Qualcomm will argue for its current patent and licensing model and fee schedules. The outcome of the trial will either boost Qualcomm's $5.2 billion a year royalty stream or crash it to a fraction of that amount. LINK

Nobody disagrees that Qualcomm's engineering and designs are the best in the business. They are simply whining that Qualcomm charges too much to license those technologies.

The outcome of this trial could move the stock $10 or more in either direction. I am proposing we buy a call and a put and hang on for the ride. One of them could been deep in the money and the other will expire worthless.

Update 1/5: Qualcomm acted to enforce the ban on iPhones in Germany and Apple was forced to pull the specific models from stores. Germany's biggest retailer, Gravis, said it still had all Apple products on sale but that is likely to end quickly. Qualcomm posted a bond of 1.34 billion euros in order to put the enforcement into effect. According to the court order, Apple has to stop the sale, offer for sale and importation for sale of all infringing iPhones in Germany. The court also ordered Apple to recall the affected iPhones from third-party resellers in Germany.

The 10-day non-jury trial with the FTC over patent procedures began on Friday. Position 12/31/18:
Long Mar $60 Call @ $2.06, see portfolio graphic for stop loss.
Long Feb $52.50 put @ $1.39, see portfolio graphic for stop loss.

We should know from the trial watchers if Qualcomm proved their case by the middle of January. I only recommended the Feb put because any downside move should be nearly immediate while any upside move could be lasting.

QQQ - Nasdaq 100 ETF - ETF Profile


The QQQ closed $3 below our January $168 call position and they expired as expected. We entered that position in mid December and the market drop continued until Christmas. We saw a strong rebound but it was $3 short.

Original Trade Description: Dec 7th

Invesco QQQ is an exchange-traded fund based on the Nasdaq-100 Index. The Fund will, under most circumstances, consist of all of stocks in the Index. The Index includes 100 of the largest domestic and international nonfinancial companies listed on the Nasdaq Stock Market based on market capitalization. The Fund and the Index are rebalanced quarterly and reconstituted annually.

The Nasdaq looks like it wants to decline further. I am profiling a dip buy at $158.15 on the hope that the Nasdaq/ETF will not decline below 6,800/155.00.

Position 12/17 with a QQQ trade at $156.85:
Long Jan $168 Call @ $1.12, see portfolio graphic for stop loss.

Position 12/24:
Long five Jan $168 Calls @ .12 each.
Expired 1/18: Adjusted cost for 6 = $.29 each. Expired, -.29 loss.

Position 1/14/19:
Long March $170 Call @ $1.77, see portfolio graphic for stop loss.

SPY - S&P-500 SPDR ETF - ETF Profile


Nice rally on the positive comments on Chinese trade. Next hurdle 2700, 2750 then 2800.

Original Trade Description: Dec 22nd

The SPY is the SPDR ETF for the S&P-500. It was the first exchange traded fund listed in the USA starting in 1993.

If the market is going to rebound the SPY would be our vehicle of choice. This avoids single stock risk and capitalizes on the most oversold big cap index.

This is a bet on an end to tax loss selling and a post-Christmas market rebound. There is no guarantee there will be a rebound and there is the risk of some early January volatility.

There are hundreds of billions in cash on the sidelines waiting for the selling to end. Investors want to establish positions for 2019 and at the current lows there are plenty of bargains.

Position 12/24:
Long Feb $255 Call @ $3.25, see portfolio graphic for stop loss.

TGT - Target - Company Profile


Nice rebound after a lackluster week as the sector declined on warnings from other retailers.

Original Trade Description: Jan 9th

Target Corporation operates as a general merchandise retailer in the United States. The company offers beauty and household essentials, including beauty products, personal and baby care products, cleaning products, paper products, and pet supplies; food and beverage products, such as dry grocery, dairy, frozen food, beverage, candy, snacks, deli, bakery, meat, and produce products; and apparel for women, men, boys, girls, toddlers, infants, and newborns, as well as intimate apparel, jewelry, accessories, and shoes. It also provides home furnishings and decor comprising furniture, lighting, kitchenware, small appliances, home decor, bed and bath products, home improvement products, and automotive products, as well as seasonal merchandise comprising patio furniture and holiday decor; and music, movies, books, computer software, sporting goods, and toys, as well as electronics that include video game hardware and software. In addition, the company offers in-store amenities, which comprise Target Cafe, Target Optical, Starbucks, and other food service offerings. It sells its products through its stores; and digital channels, including Target.com. As of March 8, 2018, the company operated 1,826 stores. Target Corporation was founded in 1902 and is headquartered in Minneapolis, Minnesota. Company description from FinViz.com.

Target shares were beaten severely when they missed estimates by 2 cents on their Q3 earnings in November. The company reported earnings of $1.09 that missed estimates for $1.11. Revenue rose to $17.59 billion but that missed estimates of $17.81 billion. Same store sales rose 5.1%, a 3.2% improvement but missed the 5.5% consensus. Digital sales rose a whopping 49% and now contribute 2% to overall revenue.

They guided for the full year for earnings of $5.30-$5.50 and analysts were expecting $5.42. They guided for 5.0% same store sales. On Thursday Jan 10th, Target said same store sales for the November-December period rose 5.7% thanks to higher store traffic and a minor increase in ticket size. This compares to 3.4% in the same period in 2017. The company affirmed its Q4 guidance for same store sales of 5.0% and full year earnings of $5.30-$5.50. This came on the same day that Macy's warned on earnings and shares fell sharply all across the retail sector. Shares rebounded sharply by almost 2% in a weak market on Friday.

Earnings February 19th.

Since Target has already affirmed guidance, the odds are good they will beat it. The risk has been removed from the stock and their positive comments suggest the Q4 earnings and 2019 guidance will be good. I am recommending a March option to retain the call premium, but we will exit before the earnings.

Position 1/14/19:
Long March $72.50 call @ $2.08, see portfolio graphic for stop loss.

BEARISH Play Updates

No Current Puts